SECTION B: PROBLEM SOLVING QUESTIONS

Q1. ACTIIVTY BASED COSTING

Baker Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows:

Maintenance $140,000 Materials handling $ 60,000 Setups $ 50,000 Inspection $100,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted.

Estimates for the proposed job are as follows:

Direct materials $5,000 Direct labour (750 hours) $7,500 Number of materials moves 8 moves Number of inspections 5 inspections Number of setups 3 setups Number of machine hours 300 MHs.

In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver; the direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.

Respective to the four cost categories, the expected activity for the four activity-based cost drivers that would be used are as follows:

Machine hours 16,000 hours Material moves 4,000 moves Setups 2,000 setups Quality inspections 8,000 inspections

requirements:

1. Briefly explain why direct labour hours is regarded as a volume-based cost driver.

2. Using direct labour hours as the volume-based cost driver

a. Calculate the overhead rate (with correct labelling) b. Determine the total cost of the proposed job.

3. Using activity-based costing a. Calculate the activity rates of the four cost pools (correct labelling) b. Determine the total cost of the proposed job.

4. Which product costing method produces the more accurate cost assignment? Briefly explain.